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Budget Speech by the Financial Secretary (2)


14. As the Mainland economy continues to expand, it will remain a driving force for the Asian economy.  A weak US dollar will also help our exports.  With an improving employment situation and the pause in US interest rate increases, domestic demand looks set to be the key factor behind economic growth this year.  Nevertheless, there remain a number of uncertainties in the external economic environment, such as the increase in global financial market risks, whether the US property market can achieve a soft landing and the slowdown in the US economy.  We may therefore expect greater volatility in the financial markets this year.  Overall, however, I am cautiously optimistic about the economic outlook for 2007.

15. Taking all these factors into account, and in the absence of unexpected serious incidents or major external shocks, we anticipate that Hong Kong's economy will continue to record solid growth in 2007.  We forecast GDP to increase by 4.5 to 5.5 per cent, higher than the average trend growth rate for the past ten years.  As our economy gathers further strength, the employment situation should continue to improve.

16. I am also optimistic about our economic outlook over the medium term.  Hong Kong will continue to move up the value chain in services provision, and further consolidate its role as the financial, trade and logistics centre for the region.  Our economic integration with the Mainland will also achieve appreciable synergies.  Over the medium term from 2008 to 2011, we forecast an annual trend growth rate of 4.5 per cent and a 1.5 per cent trend rate of increase in the GDP deflator.  This means that the forecast trend growth rate of nominal GDP over the period from 2008 to 2011 is 6 per cent a year.

17. The continuous upgrading of productivity has seen our economy achieving strong growth whilst keeping our inflation rate at the relatively low level of 2 per cent during 2006.  The underlying trend is for a further mild increase in 2007, with the inflation rate forecast to average 3.5 per cent over the following four years.  Yet because of the reduction in public housing rentals, the implementation of the Pre-Primary Education Voucher Scheme and the measures proposed in this Budget, the inflation rate for 2007 is expected to come down to 1.5 per cent.  Moderate inflation is generally regarded by economists as a healthy sign in an economy, and should not be a cause for concern.  The Government will nevertheless keep a close watch on the inflation trend.

Directions for Development

18. The recovery of our economy has allowed us more room to consider and map out the directions for our future development.  In promoting economic development, I consider the following three principles to be crucial:

* first, market leads and government facilitates;

* second, maintain strict fiscal discipline and manage public finances prudently by keeping expenditure within the limits of revenues, striving to achieve a fiscal balance and keeping the budget commensurate with the growth rate of GDP;

* third, maintain a low and simple tax regime.

19. Our ability to undergo continuous economic restructuring is a key element underpinning Hong Kong's competitiveness.  Service industries account for 91 per cent of our GDP, and those enjoying the fastest growth include financial services, import/export and logistics.  To retain our share of the highly-competitive international market, Hong Kong must keep moving towards high value-added production and a knowledge-based economy.  Our economic integration with the Mainland is pivotal to our future development.  Hong Kong's restructuring should complement the economic development of the Mainland, and create a "win-win" situation.  To achieve this, we should focus on the following three areas:

* first, reinforce our competitive edge by vigorously developing our financial services, trade, logistics and tourism industries, thereby fostering growth in a broad range of economic activities;

* second, create a favourable environment for a knowledge-based economy by pooling talent, encouraging creative industries and facilitating research and development;

* third, care for the disadvantaged, helping them to achieve self-reliance and improve their livelihood.

(To be continued)

Ends/Wednesday, February 28, 2007
Issued at HKT 11:16


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